The premium on a three-year insurance policy expiring on December 31, 20X4 was paid in total on January 2, 20X2. If the company has a six-month operating cycle, then on December 31, 20X2, the prepaid insurance reported as a current asset would be for:

A. six months. B. 12 months. C. 18 months. D. 24 months.

B. 12 Months

Explanation:

Prepaid insurance is a current asset. A current asset is defined as asset that is to be consumed within a financial year in an organisation. A financial year or operating year is usually 12 months or one year.

When the premium was paid January 2, 20x2 for insurance policy to expire 31st December, 20x4, it means 2 extra financial or operating years have been paid. Since prepaid insurance is a current asset that can only reflect assets for 12 months, it means that December 31st 20x2 will only reflect the payment for a year.

The 2nd year premium will reflect as a long-term asset in December 31, 20x2 but will reflect as a current asset by December 31, 20x3.